Question

In September of 2013, two months after Jim and Betty finished constructing a barn, it was completely destroyed by a hurricane. Their adjusted basis in the barn was its cost, $40,000. It was not covered by insurance. The entire community has been declared a federal disaster area. Jim and Betty may elect to do which of the following?

A. Deduct $40,000 in either 2013 or 2014
B. Deduct $40,000 in either 2012 or 2013
C. Deduct $40,000 in 2012, or 2013, or 2014
D. No deduction in any year because the loss is personal

Answer 1

Jim and Betty may elect to deduct their $40,000 loss due to the hurricane in either the year it occurred, 2013, or the year immediately preceding, 2012, since it was in a federally declared disaster area.

Step-by-step explanation:

When a natural disaster strikes, taxpayers like Jim and Betty, may have some tax relief options available. Since their barn was destroyed by a hurricane in a federally declared disaster area, and they have an adjusted basis of $40,000 in the property, they may be eligible to make a tax deduction for a casualty loss.

In such events, the Internal Revenue Code typically allows taxpayers to deduct casualty losses in the year the casualty occurred.

However, if the loss occurred in a federally declared disaster area, the taxpayer has the option to claim the loss on the tax return for the year immediately preceding the year in which the disaster happened. This means for Jim and Betty's case, they have the option to deduct the $40,000 loss in either the year the hurricane occurred, 2013, or the preceding year, 2012.

Therefore, the correct option for Jim and Betty would be to deduct $40,000 in either 2012 or 2013, since those are the tax years immediately before and the year of the hurricane disaster.